Abstract
<p>In the event of economic crises, it is observed that economic volatility becomes more severe. Therefore, the aim of this study is to examine the impact of greater openness and deeper financial sector development in influencing the level of economic volatility which could trigger economic crises in both long-and short-run periods in the case of ASEAN-5 countries, namely Indonesia, Malaysia, Philippines, Singapore and Thailand. Given that more attention is needed to address the issue, the Pooled Mean Group (PMG) estimations developed by Pesaran et al. (1999) and data ranging from 1980 to 2014 were employed to address the issue. With the ability to estimate short-run coefficients at each country level and its speed of adjustment, this study further fills the knowledge gap. Based on the analysis, it is found that greater trade and financial openness may further relax economic volatility in the long-run, suggesting greater international risk sharing which soothes consumption shocks. In terms of the effect of financial development towards economic volatility, it is found that only deeper banking sector development may reduce economic volatility in the long-run, but the same may not apply in the case of greater stock market development. Particularly, it is suggested that it is in the nature of developments in the banking sector to likely provide longer financing options and greater banker capabilities in detecting riskier investments, thus giving a favourable impact on economic volatility. It is a contrast with the stock market sector where it is more likely to be more susceptible towards large and sudden capital outflows. Its tendency to provide capital towards riskier investments may worsen volatility in the longer term. Nevertheless, in the short-run, the effects of greater openness and financial development is not as obvious as in the long-run; financial openness and greater stock market sector development may significantly relax economic volatility. As suggested by the speed of adjustment, the equilibrium from short-run to long-run is corrected by 1.71% and 2.33% in a year. Cumulatively, it can be said that there is no evidence that greater openness and deeper financial development may drag ASEAN-5 into another series of crises except in the case of stock market sector development. Therefore, the source of instability in the region is likely to be driven from greater stock market sector development rather than greater openness and banking sector development.</p>
Highlights
The rapid economic expansion and several economic crises of Asian countries, especially in the ASEAN-5, in recent decades have made the South East Asian region in the centre of debate over the last three decades (Note 1) (Note 2)
It can be said that there is no evidence that greater openness and deeper financial development may drag ASEAN-5 into another series of crises except in the case of stock market sector development
The source of instability in the region is likely to be driven from greater stock market sector development rather than greater openness and banking sector development
Summary
The rapid economic expansion and several economic crises of Asian countries, especially in the ASEAN-5, in recent decades have made the South East Asian region in the centre of debate over the last three decades (Note 1) (Note 2). These economies have endured the 1973 oil price crisis, early 1980’s global economic slowdown, the 1985 Singapore financial collapse due to falling demand in Singapore’s goods and services as a result of the slump of the worldwide petroleum and marine related sectors which affected the whole region, the most notably 1997 economic crises, the early 2000 global economic slowdown as a result of 1997 crisis, affected from the U.S sub-prime crisis which emerged in 2008 and the recent ongoing effect of economic contagion which spread fast from the EU as well as the effect of China economic slumped This shows that the ASEAN-5 has experienced more crises than booming.
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